Last year, Emily Sanford had a booth at the three day Indianapolis Craft Expo where she sold a variety of silver jewelry hand crafted in India. Her before tax profit was as follows:
Sales.............$19,600
Less:
Cost of jewelry sold....$ 10,780
Gross margin..........$ 8,820
Less other expenses:
Registration fee......$ 1,800
Booth rental (6% sales) .....$ 1,176
Salary of Mindy Orwell...$ 450
Before tax profit.........$ 5,394
Mindy Orwell is a friend who takes care of the booth for approximately 5 hours from 9 A.M. until 2 P.M. Emily takes over from 2 P.M. until closing at 9 P.M. Emily has added several new designs to her collection and anticipates that in the coming year, her sales will increase by 20 percent, to $23,520. In light of this, she has fore casted before tax profit as follows:
Before tax profit in prior year.......$ 5,394a
Sales in prior year.............19,600b
Before tax profit per dollar of sales.......0.2752a,b
Fore casted sales.............$23,520
Profit per dollar of sales..........0.2752
Fore casted before-tax profit........$ 6,473
Required:
a. What is the fundamental assumption that Emily is making, and why is it obviously wrong?
b. Prepare a more appropriate forecast of before tax profit related to the Indianapolis Craft Expo.